Wednesday, May 16, 2012

Free Banking in Australia

The issue I want to raise here is this: what is the empirical evidence about systems that approximate the free banking ideal? I use the word “approximate” because obviously there is no real world example of a system that is a perfect example of the free bankers’ utopia. There are some approximations, and Australia in the late 19th century is one of them.

Although Australian banking supervision was originally done by the British Treasury, from 1846 all the Australian colonies (except Western Australia) received banking autonomy, and then from 1862 the British Treasury no longer exercised this responsibility, which passed to each colonial government. These colonial governments (or state governments as they are called in Australia) did very little to regulate banks. Under the Colonial Bank Regulations of 1840, Australian banks already had limited liability. But, unless one wants to argue that limited liability is anti-market, this was no anti-market measure.

And even the basic earlier regulations were not even followed to any great degree: the restriction on banks with regard to advances on real estate was circumvented by the 1850s by legal tricks, and in Victoria the regulation was abolished in 1888 (Hickson and Turner 2002: 154).

By the 1860s, the Australian banking system had these characteristics:

(1) a gold standard (usually dated from 1852 [Bordo 1999: 327] with a branch of the British mint established in Sydney in 1855);(2) no central bank;(3) no capital controls;(4) few legal barriers to entry;(5) no branching restrictions;(6) no credible restrictions on assets, liabilities or bank capital;(7) no legally established price controls;(8) no government-provided deposit guarantees.

What happened?

One obvious factor that a free banking system will never control is the speculative inflows and outflows of capital that any country experiences: by this factor alone there will always be the possibility of rapid inflation of the commodity money base, which will allow a surge in credit. This happened in Australia’s case: there was a surge of capital inflows in 1881–1885 and a flood in 1886–1890 (Hickson and Turner 2002: 149).

There is a real paradox here: the free bankers, much like the Austrians, make a fetish of free markets. For them only unrestricted capital movements are consistent with economic freedom, but it is this very trait that means that any free banking system will be subject to exogenous factors that cause its capital inflows and outflows to fluctuate. This is the Achilles’s heel, so to speak.

There is no reason in theory why a free banking system overflowing with foreign capital could not experience a credit boom.

Secondly, with no prudential regulation there is nothing to stop banks from

(1) lowering lending standards (leaving the bank with loans that default), and(2) buying the latest trendy, poor quality assets which will be held on their books, only to collapse in value later.

And why would a free banking system not get caught up in the speculative frenzies when people and banks think they can make money quickly on rising asset prices?

This is precisely what happened in the case of Australia: banks started directing credit to property speculators and to those purchasing what were called “pastoral securities” (Hickson and Turner 2002: 159). A new class of companies appeared that specialised in property and stock market speculation, as well as building societies and land development companies, and they obtained credit from the banks for this purpose (Hickson and Turner 2002: 159).

The speculative boom in the prices of real estate and stocks of land, land finance and mining companies reached its apogee in 1888, but terminated in October of that year (Hickson and Turner 2002: 148).

From 1891 to March 1892, 41 deposit-taking building or land finance companies failed in Melbourne and Sydney (Hickson and Turner 2002: 148). The full force of the banking crisis did not hit until after 30 January 1893 when the Federal Bank failed. From April, when the Commercial Bank of Australia was hit by the crisis, there was a major panic, and by 17 May some 11 commercial banks had been suspended, with runs on many others (Hickson and Turner 2002: 149).

There existed an organisation of private banks called “The Associated Banks of Victoria” that supposedly existed partly to co-ordinate the activities of banks. Free bankers think such associations will engage in self-regulation and provide a lender of last resort function in times of panic.

This is not what happened in the Australian case: in January 1893 the Federal Bank failed and it was a member of the Associated Banks association, and then the Commercial Bank of Australia failed without any help forthcoming.

What is ridiculous here are the excuses offered by free market apologists: they contend that the Victorian Treasurer’s attempts to force the Associated Banks to provide assistance to smaller bankers and the bank holiday introduced by the Victorian government in early 1893 exacerbated the crisis. Yet the full scale panic had already begun in April 1893, before these actions. None of these actions had anything to do with the creation of the asset bubbles in the first place, which had occurred in the previous decade of the 1880s. There had already been a credit boom in the decade before 1893.

From April 1893, there were a number of limited interventions some colonial governments undertook: some banks that suspended were allowed to engage in reconstruction (conversion of deposits into preference shares, changing short-term deposits into long-term fixed deposits and the issuing of new shares to obtain capital).

In Victoria, the state government declared a 5 day bank holiday on Monday, 1 May 1893, which is adduced by some as a move that made matters worse. However, what is not said is that history ran an experiment for us in 1893: the Victorian government did very little to stop the crisis in the way of interventions to save the financial system in addition to its bank holiday. In contrast, the New South Wales government took quite different action.

In New South Wales, the government made the bank notes of the major banks – the Bank of Australasia, Bank of New South Wales, City Bank of Sydney and Union Bank – legal tender, and announced that it was willing to act as a lender of last resort (on 21 April 1893). This restored confidence to the financial sector in New South Wales to such an extent that the crisis ended in a couple of days here (Hickson and Turner 2002: 165).

The government of Victoria failed to intervene in the way the New South Wales government did, and the result was clear: in Victoria there was a deep crisis and in New South Wales the crisis was largely avoided.

Victoria was a large part of the Australian economy, so it was only natural that the financial crisis exacerbated a recession in these years. In fact, the familiar pattern of debt deflationary disaster had already hit the Australian economy in 1890, after the asset bubble collapse and deleveraging of the over-indebted private sector:

“In Australia, GDP fell for four years running, from 1890 through 1893 ... Unemployment rose sharply. Immigration slowed and tentatively reversed direction. Social disorder spread, led by protesting sheep shearers, dock workers, and miners. Post-1893 recovery, if it may be called that, was slow and uneven” (Adalet and Eichengreen 2007: 233).

As always, when we are dealing with 19th century GDP, we can only ever have estimates.

One estimate is that real GDP fell by around 10% in 1892 (Kent 2011), and by 7% in 1893, and deflation occurred from 1891 to 1897. Angus Maddison has made the following estimates:

On these figures, a moderate recession began in 1890, a recovery occurred in 1891, but this did not last and a real, technical depression (that is, a period of real GNP/GDP contraction of 10% or more) hit Australia in 1892, which continued into 1893.

After 1893, there was uneven growth, with actual recessions in 1895 and 1897, and the economy was mired in what we can call a chronic underemployment disequilibrium, just as many countries were in the 1930s.

APPENDIX: ESTIMATES OF AUSTRALIAN GDP IN THE 1890s

There exist three modern estimates of Australian GDP in the 19th century, as follows:

We have agreement here on the growth rates calculated from Angus Maddison’s adjusted citation of them.

On Bryan Haig’s revised figures, there was

(1) very low growth in 1890–1891,(2) a mild recession in 1892, and (3) essentially stagnation in 1893 (with a growth rate of 0.17%).

Even these figures confirm that something had gone wrong in the Australian economy in these years, even if they are quite different from Butlin (1962).

Moreover, there are problems with Haig’s estimates. Angus Maddison’s assessment of Bryan Haig’s revised figures for 1860–1911 demonstrates to me that they are not necessarily better than those of Butlin at all. Angus Maddison points out the following:

(1) for 1860–1911 Haig has no quantitative measure of 70% of GDP (Maddison 2006: 453);

(2) Haig described the estimating procedure he used in but five pages, but Butlin provided his in 200 pages (Maddison 2006: 453);

(3) Butlin provided data for more states than Haig did: Haig used data from Victoria and New South Wales to fill in gaps for overall Australian estimates (Maddison 2006: 453).

(4) one of Haig’s fundamental objections to Butlin’s estimates was that they conflicted with traditional interpretations of Australian economic history: but this is just an unreasonable a priori objection. As Maddison says in reply to this, “it is up to those who disagree with Butlin to prove him wrong” (Maddison 2006: 451).

All in all, I do not see any reason to think Haig’s estimates are to be preferred.

37 comments:

Lord keynes, my knowledge of Australian banking and economic history is not nearly as extensive as my knowledge of American with most information coming from your blog. However, a couple of comments. First, a free banking environment is.not entirely immune to booms in other economies. If other countries with intervention experience an increase in base money and pyramiding of credit, some of the extra base money would percolate across an integrated market economy, allowing free banking environments to expand credit as well. Additionally, concerning the supposed depression afterwards, it is important to keep in mind that the Us 1890s recession has been shown with new statistical evidence to be have been much more mild than what was commonly thought(this is not suggesting that there was no recession, or that those statistics are the final word. New estimates could show them to be even less severe, eg.) Would the Australian case be another example of inaccurate statistical evidence? I don't know much about Australia, but if it was true for America during that period, one would expect it also for Australia.

(1) Australia in fact had GDP data even in the 19th century, yet there are two modern estimates based on these data (with further adjusted figures by Angus Madison). As as I said above, they remain estimates, not certain figures.

If the overexpansion cannot account for the boom in the late 1880s, one question still remain. How has the boom been financed ? Selgin, in “Bank Lending ‘Manias’ in Theory and History” (1990), may have the final words.

"Pope’s annual data, presented graphically (1989, p. 20, fig. 8), are more plainly inconsistent with the overexpansion hypothesis. According to Pope’s chart, in the seven years preceding the crisis the average reserve ratio of the 13 banks that survived the crisis varied from about 0.17 to about 0.19, with no apparent trend. The average ratio of the 13 suspended banks actually rose steadily from about 0.15 to about 0.16. These figures are consistent with the decline in Australian lending rates during the period in question. [...]

The boom was financed, not by any increase in the bank money multiplier, but by injections of high-powered money from Austra-lian gold mines and from the British capital market. [13] When injections from Britain came to a sudden end with the Barings Crisis of 1890, many Australian banks were obviously unprepared; but this did not make them guilty of having lent excessively and “irrationally” during the boom years. (pp 275-276)"

Hickson and Turner ironically give some support for the evidence brought by Selgin (1990) when they wrote : “However, by 1891, the ‘zombie’ land mortgage companies were no longer able to survive as the inflow of British deposits dried up. Correspondingly, the commercial banks were forced to ration credit to land mortgage companies due to the increased cost of raising deposits in Britain. As a result, from 1891 to March 1892, in Melbourne and Sydney alone, deposit-taking building or land finance companies failed”.

I don't think Australia had GNP figures back then, considering the US only started using GNP in the late 20s. They probably had industrial output estimates like the us (eh frickeys), but they were inaccurate relative to modern estimates (ala Romer) of industrial figures.

One of the key issues here is the banks’ liquidity and Merrett goes on to argue that the ‘inescapable conclusion is that the long decline in liquidity standards seriously undermined the banks’ ability to cope with the growing problem of higher risks’ (1989:77). However, as George Selgin points out

“the facts tell a different story. Merrett (1989, p. 75) reports that the aggregate reserve ratio … fell from .3217 in 1872 to .2188 in 1877; but his figures for later five-year intervals show no further downward trend … . Even the lowest figure compares favorably to those from other banking systems, both regulated and free. It is much higher than Scottish bank reserve ratios for the mid-nineteenth century … and about the same as ratios for free Canadian banks in the late nineteenth century and for heavily regulated US banks today.” (Selgin 1990a: 26–7)

He also notes that

“Pope’s annual data, presented graphically … are more plainly inconsistent with [the falling reserve] hypothesis … in the seven years preceding the crisis … the average ratio of the thirteen suspended banks rose steadily from about .15 to .16 … . Pope’s reserve figures also show a minor difference only — perhaps two percentage points — between the reserve holdings of failed Australian banks and those that weathered the crisis. This also suggests that ‘overexpansion’ was not the root cause of the banking collapse.” (Selgin 1990a: 27)

And note, finally, that the difference between the capital ratios of banks that were to fail and banks that were not is relatively small — under 3 percentage points, and usually considerably less — and shows no tendency to grow as the dates of the failures approach (1989: figure 8).

In New South Wales, bank notes were given legal-tender status to ease access to means of payment, and the government declared a 5 day bank holiday. Some banks never reopened their doors. Tens of thousands of depositors had their claims extended — for four years and more & before any withdrawals could be made, and in some cases claims were converted into stock and preference shares. Bank share prices fell heavily. The banks retrenched, withdrawing from the business of long-term lending. The “depression” of the 1890s followed.

Dowd challenges the conventional wisdom about this crisis, noting that the fall in the loans to capital ratio from 20 per cent in 1880 to 12.5 per cent in 1892 was not representative of the condition of most banks. He dismisses a domestic credit crunch on the grounds that advanced did not actually decline in the period of failures. He argues that the big banks had already adjusted their portfolios by holding less speculative assets by 1890. In conclusion he argues that the crisis was mainly caused by inadvisable government intervention in the financial sector. The bank holiday, he concludes, was unnecessary and damaged confidence. Consistent with his view, the standard historical statistics do not show much of an output decline.

LOL.. Sweden? You mean the country that was home to the world’s oldest central bank, the Riksbank, which began in 1668 as a private bank, and from the 19th century was the major credit institution and issuer of bank-notes in Sweden.

- the new limited liability banks and enskilda banks were prohibited fromowning or lending against shares or real estate!! (Richard S. Grossman, Unsettled Account: The Evolution of Banking in the Industrialized World, p. 208) In other words: intrusive government regulation to stop reckless credit flows to speculators. And you call this "free banking"!

- then in the 1897 all note issue was centralised in the Riksbank

"You can not deny the empirical evidence." - famous last words, Meng HuM.

"The Banking Act of 1874 required the banks to hold 10 percent of their equity capital in specie. [...] These levels were well below the reserves that were actually held by both the enskilda banks (see figure 1)."

"The usury laws were not the only reason for the limited number of depositors.Other laws and regulations limited the popularity of deposit banking.The banks were, for example, by the Banking Act of 1846, prevented fromaccepting deposits of less than 500 rdr rgs (Brisman 1924, pp. 229ff.; Nilsson1981, pp. 68, 315).23 Because the enskilda banks financed their lending withnote issue, and the bulk of their customers were wealthy, the effect of thisrestriction was, however, limited."

"Furthermore, we can see that the banks, at least during the later part of the free banking regime, were not subject to any legal barriers to entry. The charters were in the 1840s reduced to a mere formality, and after 1851 new banks, provided they were partnerships, only had to register at the Town Hall (Nilsson 1981, pp. 134, 246)."

" Nilsson (1984, pp. 395f.) summarizes: “With Stockholms Enskilda Bank as a pilot case, banks were now given full freedom to conduct their business within the framework of general business law.” "

"The note issue was initially neither controlled by any legal reserve requirements nor by government inspection. The note banks were chartered with the explicit rule that the authorities would “under no circumstances” intervene to support a private bank in financial trouble. Nor could the banks expect to get any help from the Riksbank since this bank was their main competitor."

"The private banks could neither now nor later count on any kind of support from the government and the government may under no circumstances interfere with, support, or bail out, their business more than they do for other kinds of businesses."

I suggest you read the entire article.http://menghusblog.files.wordpress.com/2012/02/free-banking-in-sweden-1830-1903-experience-and-debate-erik-lakomaa.pdf

- right up until 1863 there were formal ceilings on interest rates! Does this sound like free banking to you?

- these Enskilda Banks by decree of 1864 banking law were subject to monthly bank inspections

- the new limited liability banks and enskilda banks were prohibited fromowning or lending against shares or real estate!! (Richard S. Grossman, Unsettled Account: The Evolution of Banking in the Industrialized World, p. 208) In other words: intrusive government regulation to stop reckless credit flows to speculators.

Once again, I recommend you read the whole article. Otherwise, any discussion with you is futile. And again, you cite Grossman's book, but I do not have access of the entire book (page 208 is not shown in the link you gave me) or you should give me the right link. Anyway, Lakomaa wrote :

"The Swedish system obviously did not, de jure, fulfill the Smithean definition, and some researchers, notably Ögren (2003), have preferred to use the term competitive note issue in order to distinguish the Swedish system from systems which were unquestionably free banking systems, such as the Scottish system. Nevertheless, the restrictions were so marginal that they did not become binding restrictions. Hence, it is still possible to claim that the system de facto was unregulated." (see also page 33-34 of the above document)

"The banks also used the absence of government regulation to create trust. Wallenberg assured the customers of Stockholms Enskilda Bank that the bank would never accept governmental support; this was also stated in the articles of association (Nilsson 1981, p. 319).18 The bank could in this way signal that it would not assume more risk than the partners could bear."

"The conclusion is thus that even though the Swedish banks were subject to some restrictions de jure, these restrictions did not restrict the banks de facto, except for limiting their competitiveness in relation to the Riksbank. The most damaging restrictions were the ban on small denomination notes and the special taxes levied on the private banks (Jonung 2000, p. 23)."

You might think that the relative limitation on competitiveness is a crucial point. But in many other examples of free banking (suisse, france, scotland, foochow etc.) there are a lot of competitive banks, and no instability. (see The Experience of Free Banking).So, this restriction is of little importance, for the swedish case.

The ban on small denomination is of little importance, too. (see Scottish free banking, L. White)

We are not discussing some "ban on small denomination notes and the special taxes levied on the private banks."

These are the main points I raised:

- right up until 1863 there were formal ceilings on interest rates! Does this sound like free banking to you?

- these Enskilda Banks by decree of 1864 banking law were subject to monthly bank inspections

- the new limited liability banks and enskilda banks were prohibited fromowning or lending against shares or real estate (Richard S. Grossman, Unsettled Account: The Evolution of Banking in the Industrialized World, p. 208) In other words: intrusive government regulation to stop reckless credit flows to speculators.

These regulations destroy your notion that this was a free banking system.

At this point, you're just wasting my time. Unless you respond to my specific points, don't expect any more of your comments to be published here.

-> "right up until 1863 there were formal ceilings on interest rates!"

I have already responded to this specific point. This is a regulation of little importance. Here's why :

"Another important factor in the success of the banking system was the abolishing of the usury laws in 1864. The usury laws, stemming from the Middle Ages, had over the years significantly hampered economic development, even though the financial markets early learned how to avoid the most damaging effects:22 In order to charge higher interest rates than the allowed 6 percent, a part of the interest was called commission or loan fee. The usury laws were nevertheless one of the major reasons why many note issuing banks, but few deposit banks, were founded in Sweden. The note issuing banks could finance their lending at lower cost and they could therefore also offer lower rates than the deposit banks. The interest rate ceiling on lending also kept deposit rates down, making it hard for banks to attract depositors."

This regulation hurts the banking system. It does not protect the banks from, say, financial risk (ie, recklessness). And, assuming you're right (even if this is not the case), the free banking period lasts from 40 years (1863-1903).

-> "these Enskilda Banks by decree of 1864 banking law were subject to monthly bank inspections"

I have already responded to that in my previous post. From Lakomaa :

"Or, as Jonung (2000, p. 4) writes: The note issue was initially neither controlled by any legal reserve requirements nor by government inspection."

-> "the new limited liability banks and enskilda banks were prohibited from owning or lending against shares or real estate"

I repeat, once again. Page 208 is not shown in the link you gave me. So give me another link. The references cited by Lakomaa did not mention that.

A very slight regulation (i.e. residual restrictions) is not fully incompatible with a laissez faire policy. What you need to remember, and keep in mind, is that a lightly regulated banking system could be more efficient than the heavily regulated banking system.

See Kam Hon Chu :http://www.cato.org/pubs/journal/cj16n1-3.html

In that case, proponents of free banking scored a point. You should also keep in mind that the Free Banking episodes in Scotland, Ireland, France, Switzerland, Colombia, Foochow (and to some extent, Hong Kong and Chile) worked very well. So even if we consider this restriction for the swedish case, we cannot deny and reject the possibility that this regulation is of little importance, and that swedish banking system could be efficient even if this regulation had been removed. Because there is no such regulation during the other free banking episodes I mentioned.

See Briones and Rockoff.http://menghusblog.files.wordpress.com/2012/03/do-economists-reach-a-conclusion-on-free-banking-episodes.pdf

For the australian free banking, I can concede that Dowd is wrong about the Victorian Treasurer. But Hickson and Turner were wrong about the unsoundness of the banking system. Their Figure 2 (Hickson and Turner) shows no decline in the ratio of shareholders’ capital to deposits between 1882 and 1892. Just a very, very slight decline. Also, their Figure 3 shows there is absolutely no decline in the average bank’s liquidity ratio between 1882 and 1892.

So I cannot reach any conclusion about the specific case of australian free banking.

(1) you no longer claim Sweden was a free banking system but a "lightly regulated banking system"

(2) "So even if we consider this restriction for the swedish case, we cannot deny and reject the possibility that this regulation is of little importance, and that swedish banking system could be efficient even if this regulation had been removed."

On the contrary, it sounds to me like this "intrusive" government regulation stopped reckless credit flows to speculators, providing a measure of stability lacking in other cases. Nor, despite what you say, was the this the only regulation in this period.

(3) In Australia's case, you never dealt with

(i) how banks loaded up they were on bad loans to speculators and worthless financial assets. Those banks exposed to asset losses from Victorian real estate and stock market deflation were the ones most badly hit:

The ”intention” of the banking law of 1830 was that “banks” should only service the public (i.e. not commercial entities). It was also said that Banks with the word “Bank” in their names could not lend against stocks and real estate. (there were also special limited liability credit companies who specialized in commercial lending – they had names like “trade companies” e.g Göteborgs Handelskompani)

In theory the description is correct. However, in practice also (enskilda) banks did lend to companies and against stock and real estate. So the restriction was not binding.

"There are a ton of examples of Enskilda banks lending to companies and against stock or real estate. The references I know of are Swedish however. This is however one in English. http://libris.kb.se/bib/9722918"

You call a GDP fall of 12.29% "not ... much of an output decline"?! LOL.

Anyway, I already pointed out above that Bryan Haig’s revised figures for 1860–1911 are not necessarily better at all than those of Butlin.

(1) for 1860–1911 Haig has no quantitative measure of 70% of GDP (Maddison 2006: 453);

(2) Haig described the estimating procedure he used in but five pages, but Butlin provided his in 200 pages (Maddison 2006: 453);

(3) Butlin provided data for more states than Haig did: Haig used data from Victoria and New South Wales to fill in gaps for overall Australian estimates (Maddison 2006: 453).

In conclusion he argues that the crisis was mainly caused by inadvisable government intervention in the financial sector.

That is utter rubbish.

(1) the state interventions from April 1893 did not cause the creation of the asset bubbles in the first place, events which happened in the previous decade of the 1880s. There had already been a credit boom in the decade before 1893 long before any bank holiday.

(2) the full scale panic had already begun in early 1893, before the government actions. As Hickson and Turner point out NSW government action stopped their banking crisis - it is mad beyond words to think that if nothing had been done, there would have been no severe financial crisis.

"He dismisses a domestic credit crunch on the grounds that advanced did not actually decline in the period of failures"

What "did not actually decline in the period of failures"?

"Fluctuations in Real GNP Growth Rates (in percentage points)

Where did you get your data from? Anyway, as I have explained above, a debt deflationary crisis of an over-indebted private sector can cause recession and did so in the US 1929-1930 before the financial crises and severe bank failures.

There is probably no other explanation. Hickson & Turner claimed that australian banks were too reckless with their lending, but data disconfirmed that :

"Merrett (1989, p. 75) reports that the aggregate reserve ratio … fell from .3217 in 1872 to .2188 in 1877; but his figures for later five-year intervals show no further downward trend … "

"in the seven years preceding the crisis … the average ratio of the thirteen suspended banks rose steadily from about .15 to .16 … . Pope’s reserve figures also show a minor difference only — perhaps two percentage points — between the reserve holdings of failed Australian banks and those that weathered the crisis. This also suggests that ‘overexpansion’ was not the root cause of the banking collapse."

"Pope’s reserve figures also show a minor difference only — perhaps two percentage points — between the reserve holdings of failed Australian banks and those that weathered the crisis.

(1) And those are disputed by Hickson and Turner 2002 159:

"Another indicator of increased exposure to risk in the banking system prior tothe crisis is shown in Figure 3, which displays a decrease in the average bank’sliquidity ratio, with the obvious consequence that the cost of satisfying any sharpincrease in deposit outflows increased dramatically. Furthermore, the evidence from Table 2 demonstrates that the banks that suspended or failed had substantially lowerlevels of liquid reserves than those that survived."

(2) Nor is this the only issue. The issue here is not only reserve holdings, but how loaded up they were on bad loans to speculators and worthless financial assets.Those banks exposed to asset losses from Victorian real estate and stock market deflation were the ones most badly hit:

Hickson and Turner 2002 pp. 159-160.

(3) Also the extent of reliance of UK capital:

"The average amount of British deposits held by banks that failed or suspended was considerably higher than that for those which survived. While it is possible to offset any increased risk stemming"

LK -> "Furthermore, the evidence from Table 2 demonstrates that the banks that suspended or failed had substantially lower levels of liquid reserves than those that survived."

Wrong. Figure 2 (Hickson and Turner) shows no decline in the ratio of shareholders’ capital to deposits between 1882 and 1892. Just a very, very slight decline. Also, Figure 3 shows there is absolutely no decline in the average bank’s liquidity ratio between 1882 and 1892.

(1) "Furthermore, the evidence from Table 2 demonstrates that the banks that suspended or failed had substantially lowerlevels of liquid reserves than those that survived."

(2) You've not addressed the further issues - just as important - of how failed banks were loaded up they were on bad loans to speculators and worthless financial assets.Those banks exposed to asset losses from Victorian real estate and stock market deflation were the ones most badly hit.

(3) You've not addressed the further issue of weakness owing to the extent of reliance of UK capital that was withdrawn.

Jan said: Your absolutly correct Lord Keynes.This nonscence to descript Sweden as some sort of Libertarian paradise is from a swedish outlook somewhat pathetic.Not long ago was Sweden of same Hayek-Mises Libertarian´s a exampel of a society on the "Road to Serfdom"! I recommend them to read some from our foremost Economic-Historian Professor Lars Magnusson, vice chancellor at Uppsala University.He explain the development of Banking in Sweden very clear and very welldocumented but in the same version as you in his books:

An Economic History of Sweden. Routledge. London and New York 2000.The State, Regulation and the Economy. A Historical Perspective. Edward Elgar. Cheltenham 2001.Proto-industrialisation in Scandinavia. Berg Publishers Ltd. Leamington 1987. (With M. Isacson).I recommend them to read some Magnusson and come back with a better understanding instead this cherrypicked facts and distortion of context.

I agree both that 1) there are gaps in the White/Selgin theory of free banking and 2) that the historical record is ambiguous on the success free banking. (The same is true of theory and practice of central banking)

However as a libertarian I believe that:

1) There are parallel tracks in monetary theory that may develop beyond the commodity-based free-banking models - perhaps along the lines sketched in Hayek's "Denationalization of Money". Selgin himself seems to be going down this road.

and

2) The complexities (and gaps) of monetary economic theory must not be allowed to lead to non-libertarian conclusions. Pure Austrian theory may not have a ready-made answer to these problems. But I believe that co-operation between individuals within a market system is the key to finding a solution not a centralized, enforced Keynesian model where the state has control over all the levers. That road leads to North Korea (with its 0% unemployment and no "demand for money problem")

Odd how most of the modern free banking school tends to spend a big portion of its time debating with Rothbard's biggest modern adherents.

Anyway, I'm aware this is an old post, but I got directed here from the local Free Banking Temple and I figured I'd take a swing at things:

I find your argument unconvincing. A single correlation never proved anything and this time is no different. The side-by-side comparison of Victoria and New South Wales isn't a damning indictment or even that great an example, considering the dearth of data involved. What other factors might there have been in the difference? Was there a difference in the composition of supplies and demands between the two provinces? We don't really know, reading just the information contained in your post, we have to just believe in your narrative.

That's another issue I'm finding with the post. Your narrative is very barebones. From one perspective (that is, from your perspective) it's fully clothed, with data hanging from every turn along its path, but from any other perspective that clothing only covers one facing and it is stark naked on all others. I've read entire multi-hundred page dissertations on periods of economic evolution covering only a few years that barely manage to scrap together a string bikini's worth of data to cover those years.

You've got GDP figures and that's it. That's not a convincing case, that's a slasher flick. Sure, it's scary if you're an inexperienced teenager, but anybody with any experience in the real world at all, or even just with slasher flicks, is just going to have trouble paying attention, let alone being disturbed or otherwise fearful of what they're watching.

Do you have an in-depth look at the 1893 depression on hand? A detailed price series? Production index? Anything? I'd like to review the evidence -- ALL the evidence -- before reaching anything even remotely resembling a conclusion, and you should like to do that, too, if you value your intellectually integrity.

(1) "I find your argument unconvincing. A single correlation never proved anything and this time is no different."

You actually doubt that the depression of the 1890s was related to the banking collapse? So presumably you think America's depression 1929-1933 had nothing whatsoever to do with the financial sector collapse as well? Is that correct?

(2) despite what you say, the post is based on articles cited above containing an "in-depth look at the 1893 depression" as well as a "detailed price series" and "production index".

How else do you think Butlin and others calculated the real GDP for these years?